WASHINGTON – Despite a program allowing employers and workers to seek determinations from the Internal Revenue Service (IRS) of whether workers are employees or independent contractors, many employers continue to misclassify millions of workers as independent contractors instead of employees. When this happens, employers avoid paying a significant amount of employment taxes, according to an audit publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

“This problem adversely affects employees because the employer’s share of taxes is not paid and the employee’s share is not withheld,” said J. Russell George, Treasury Inspector General for Tax Administration. “If left unchecked, the problem will continue to deprive the Federal Government, and the American people, of millions of dollars in lost revenue every year,” he added.

The IRS’s Determination of Worker Status Program (referred to as the SS-8 Program) allows either a business or a worker to request a determination letter from the IRS regarding a worker’s Federal employment tax status as an employee or independent contractor. TIGTA conducted its audit to evaluate whether the IRS’s SS-8 Program is effectively processing worker determination requests and whether the subsequent rulings are being followed.

TIGTA analyzed 5,325 closed Calendar Year 2009 worker determination rulings in which the individual was ruled an employee. Results showed that not all employers are complying with the determination rulings.

TIGTA found that of those determinations, 17 percent of employers appeared to comply with the ruling by issuing the appropriate forms to their workers; 19 percent of employers appeared not to comply with the determinations; and 65 percent of employers did not issue the correct forms to their workers, either because the workers no longer worked for them or the compensation was not reported to the IRS. Tests of the 5,325 worker determinations included 5,067 employers.

TIGTA made four recommendations to improve program performance and management and increase employer compliance; the IRS agreed with all four and agreed to implement the recommendations.

Note: The difference between the date TIGTA issues an audit report to the Internal
Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.

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